The OCIE is tasked with administering the SEC’s National Examination Program (NEP). As part of the NEP, auditors in Washington, D.C., and in the commission’s 11 regional offices conduct reviews of SEC-registered entities, including broker/dealers, transfer agents, investment advisers, investment companies, securities exchanges, clearing agencies and self-regulatory organizations.
The list is divided into five sections that cover market-wide priorities and the NEP’s four program areas, which include the following: investment advisers and investment companies; broker/dealers; exchanges and self-regulatory organizations; and clearing and transfer agents.
There are six market-wide priorities identified in the report:
Retirement Vehicles and Rollovers. The SEC staff will undertake several initiatives related to retirement vehicles and rollovers, including examining the sales practices of investment advisers targeting retirement-age workers to roll over their employer-sponsored 401(k) plan into higher-cost investments. Broker/dealers will also be examined for improper marketing practices and such things as product suitability, churning (excessive trading in a client account meant to generate extra commissions), and use of misleading professional designations.
Fraud Detection and Prevention. The U.S. capital markets are built on trust, says the OCIE, and such events as scams, theft, unfair advantage and other fraudulent conduct erode that trust and adversely affect investors and the efficient functioning of markets. For that reason, the NEP will continue to utilize and enhance its quantitative and qualitative tools and techniques to identify market participants engaged in fraudulent behavior.
Corporate Governance, Conflicts of Interest, and Enterprise Risk Management. The NEP will continue to meet with senior management boards of entities registered with the SEC, including their affiliates when appropriate, to discuss how each firm actively identifies and mitigates conflicts of interest and other legal, compliance, financial and operational risks.
Technology. The capital markets are experiencing a decades-long revolution in technology, says the OCIE, and the increasing complexity, interconnectivity and speed fostered by technology continue to challenge market participants and regulators. The NEP will continue to examine governance and supervision of information technology systems, operational capability, market access, information security and preparedness to respond to sudden malfunctions and outages.
Dual Registrants. The convergence among broker/dealers and investment advisers continues to be a significant risk for investors, argues the OCIE. Auditors will examine whether representatives of dual registrants may influence whether a customer establishes a brokerage or investment advisory account, which may in turn create a risk that customers are placed in inappropriate accounts.
New Laws and Regulation. SEC staff will review general solicitation practices and verification of accredited investor status under newly adopted Rule 506(c) under the Securities Act of 1933. The staff will also be conducting reviews to assess compliance with recently adopted rules by municipal advisers. Similarly, in the event that rules are put in place regarding security-based swaps dealers and other registered entities created or impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC expects to allocate resources to conduct reviews of those registrants.
For the investment adviser and investment company examination program, the SEC plans to examine such areas as safety of assets, conflictions of interest inherent in certain investment adviser business models, and marketing practices.
Other priorities in the investment adviser/company space include examining SEC-registered advisers that have not yet been subject to any examination, wrap fee programs, quantitative trading models, presence exams, payments for distribution in guise, and fixed-income investment companies. Money market funds and alternative investment companies are also slated for closer examination, along with securities lending arrangements.
For broker/dealers, the SEC plans to examine inappropriate sales practices and fraud risks, as well as general firm supervision levels and securities trading practices. Also of importance for the 2014 NEP are anti-money laundering programs.
Another area of regulatory concern for broker/dealers is the suitability of variable annuity buybacks, following reports that insurance companies are offering to repurchase variable annuity products with less favorable terms.
Looking to self-regulatory organizations (SROs) and market oversight, the SEC plans to continue regular reviews of the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board, and the national securities exchanges for both equity and options markets.
Specific priorities in this area include targeted examinations of perceived control weaknesses at the national exchanges. The staff will continue its review of order types by focusing on the options exchanges in 2014.
In addition, the examination staff plans to coordinate with the Division of Trading and Markets to conduct pre-launch reviews of new exchange applications to determine whether each has the capacity to carry out its responsibilities as an SRO by enforcing members’ compliance with federal law and the exchange’s own rules.
Finally, the SEC also announced priorities for its clearance and settlement exam program.
First, examiners will focus on the implementation of annual exams for clearing agents, as mandated by the Dodd-Frank Act. That law requires the SEC to annually audit the clearing agents for which it serves as the primary supervisory agency. These include the Depository Trust Company, the National Securities Clearing Corporation, the Fixed Income Clearing Corporation and the Options Clearing Corporation.
Areas for review will be determined through a risk-based approach that incorporates new rules and standards.
In examining transfer agents, SEC staff will focus on three core activities: the timely turnaround of items and transfers; accurate recordkeeping and associated retention; and the safeguarding of funds and securities.
Other areas of focus will involve transfer agents that service micro-cap securities and private offerings, policies and procedures adopted by transfer agents for handling and transferring certain damaged certificates, and agents serving as third-party administrators (TPAs) for parties other than the issuer of a Section 12 security (such as a retirement plan).
The complete list of 2014 examination priorities is available here.